Corporate Reorganizations: Examination (May 1971) William & Mary Law School

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Faculty Exams: 1944-1973 Faculty and Deans

1971 Corporate Reorganizations: Examination (May 1971) William & Mary Law School

Repository Citation William & Mary Law School, "Corporate Reorganizations: Examination (May 1971)" (1971). Faculty Exams: 1944-1973. 237. https://scholarship.law.wm.edu/exams/237

Copyright c 1971 by the authors. This article is brought to you by the William & Mary Law School Scholarship Repository. https://scholarship.law.wm.edu/exams CORPORATS RE ORGAN IZATIONS EX3.mina tion

May, 1971

1:1.S tl." UC ti o n s

_ ~ :nswer all ques~io~s fully, giving appropriate code :eJ..~rv - ~~es . Assume -eha -e all references to lTstocklf are lT -c~ , ~ vo~lng corn..YQ on unless otherlj-J ise indicated. In each ~l-cu~tlon, _conSider the presence or absence of a reorgan lza tlon and -ehe na ture and ext-en t to which o'a in or loss • -. ~ 0 are recognlzen ~o each participant in the transaction ~1.1ess otherwise instructed. - ,

Corporation X is engag ed in the manufacture and sale of wood products, has a net worth of $900 , 000 and its stock is owned equally by A, Band C. Corporation Y is eng aged in the wholesale lwaber business, has suffered financial reverses in recent years, and is own~d equally by D, 3 and~. yTs operating assets have a basis of $500,000 and an fmv of $ 600 , 000. yTs other assets have a basis and fmv of $200,000 and its liabilities, all unsecured, are $200 ,000 . y1s estimated net operating losses for the current year and earlier , years, which are all el igi ble for- carry- forward, are $90,000 . Corpora tior : X desires to acquire yT s assets or control of Y and D, E and F a re ' agreeable if they, or Y, will receive stock in X, securities from X or cash . Y shareholders have a basis for their stock of $40 ~ 00~ per share and it is estimated that their stock is worth $50.00 per share.

1. I t is proposed that X corporatiop:; purchase yT s operating assets for $400,000 in cash and $200 ,000 in securities, payable to Y, which in turn will liquida t e. Is this advantageous to X? To Y or its shareholders?

2. It is proposed that X issue voting stock to Y, assume Y liabilities and receive all Y assets. Y will then liquidate . 3 . It is proposed that X acquire 5/6 of yTs operating assets in exchange for X stock, that X not assume liabilities and that Y discharge liabilities and liquidate. 4. It is proposed that Y corporation issue new stock to X corporation, for cash and securities, that Y then redeem the stock held by the other Y stockholders and that Y corporations then be liquidated into X corporation . . 5. It is proposed that Y corporation merge into X corporation under an arrangement whereby for each ~hare of Y stock outstanding X will issue one share of X stock worth $20.00 and one 20 year 6% ~secured note having a face amount of $30. 00 .

, . . , X cor-oo~_ aTio~_ 6. It is proposed that Y corp ora-elons merge In-co , - '-' - ~' ~~der an arrangement whereby each Y shar~h~lder can_elec-c -eo receive non- voting, preferred X stock or X ~ecurltles~ M~ N, an~ O,_Y stockholders holdina 60% of the Y s-cock, elec-eed ~o recelve ~ne X stock . The rema ini~gholders of 40 ~; of the Y s tock elected -co r e c e i ve sec ur i tie s . Corporate Reorga niza tions Page 2

X corporation, own e d e qua lly by A , B a nc C is in the ice cream business and h a s substa ntia l earnings and profi ts. A Band C wish to diversify their investments . The stockholders of Y corporation . ~ich is engaged in the dairy products distribution busine~s. wish ' to either sellout or amalgomate Hith a larger enterprise . X and Y work out ~ package under Hhich for each 10 shares of Y stock surrendered to X, X wlll ~xchange one share o f ~ voting stock and issue one 6

III

On January 1, 1960, X corporation issued 1, 000 shares of stock each to A, B and C for $20. . GO per share and began doing bus ines s . The business prospered and on December 20, 1 970 its assets consisted of land, improvements and equipment with a va lue of $150,000 and an adjusted basis of $100,000, inventories Hith a b asis of ~10,000 and a fair market value of $ 15, 000 and cash and receivables in t he amount of $95,000. X corpoFation, Hith substantial earnings over the period, had never paid dividends. XIS lia bilities ~-.rere $'5,000 . C, a share holder in X, was the sole m-.rner of Y corporation, Hhose business vms similar to XIS. Preferring not to go through a reorganization, but desiring t o use a sale-purchase, approach, X c orporation decided to sell it3 operating assets to Y Corporation. X thereupon on De cember 20, 1970 sold its land, improvements, e quipment, and inventories to Y corporation for $ 1 65 , 000 pursu ant to section 3 37 , paid off i t s liabilities, a nd distributed $225 , 000 in c a sh and receivable s pro - rata to A, Band C, each r eceiving $85,000 in complete liquidati on. A and B s.l.lOrtly thereafter i nvested $30,000 each in Y voting COrrLmon stock and C invested $30,000 in Y 2 0 - year unsecured notes at 6

Are there any advantages to thei~ approach as opposed to a traditional- type reorganization? Discuss fully.

A, B, C and D mvned X corpora-clon, which 1,-.ras engaged in the ~oles a le dis t ribution busin ess and at the time was handling principally the products of Z corporation, an LL~r8 l ated enti ty . X corporation had a falling out wi th Z and chose to do no further business on beh a lf of Z. XI s director adopted a plan of liqu i dation under sec-cion 337 in November of 1970 an d- proceeded to sell to Z certain supply c ontr acts with XIS customer~ for the s u ....m of ~20 . 000 . X then dis t ributed its warehouse . equipment. c a sh . invent~ri~s. ca~h and remaining as sets to A, B, C and D pro-rata in comnlet.e liquidation on December 30. 1970 . X was on a Jul~ I-Jlli~e 30 fisca l year. A, B, C and D each f iled a tax return rep;rting sizeable c apit al ga ins by r eason of the ,liquidation, fue gain being l a r gely attributabl e to t h e wa r ehouse a n d eq~lpment . which h ad appreciated in value . A, B, C a nd D then conveyed the a ssets to A, each ~~ta ining $20 . 000 in cash . his pro -ra ta por tion of the total cash distributed. On March 1. 1971 A, as trustee, conveyed to assets to newly formed c o rporati o~ y , which began business a s a distributor dea ling wi th many of the f o rmer custome rs of X . Th~ a~8ets are carried on the books at a basis determined by reference to -char, of A, B, C and D. From the vantage point of a revenue agent, examine the transaction. Corpora te Reorgani z a tion Page 3

v X corporation, formed in 1 960 , p r ospered in the construction business . Its co - equa l sha r eholders in 1 964 received as a dividend one share of non- voting pre f e rred stock for each 3 shares of commo n stock held . In 1 968 . X f o r 8. business purpose created a new subsidia ry ~ansferring to it $ 200,000 wo r th of construction assets and $200,000 in cash and rece iving froY!1 the subsidiary 20 year 6 '10 notes having an aggregate face amount $ 3 00,000 and voting stock in an aggregate par va l ue of $100,000. In 1970 X distributed all of the subsidiary stock (but not the securities) to X shareholders in exchange for their shares of X preferred s tock .

Y c orporation borrowed $200,000 from a bank on March 15, 1970 and gave a mortgage on its assets . On May 1,1970, Y ' s assets c onsisted of ' a warehouse and lot having a basis of $400,000 a nd a fmv of $450,000, equipment h aving 8. basis of $100,000 and a fmv of $ 150,000, undeveloped land having a basis of $150,000 and a fmv of $ 300,000 , inventories having a bas is and i'mv of $300,000 and cash of $195,000 . Liabil i ties ,~ere $250,000, of "V-rhich $200 , 000 was secured by the undeveloped land and $50,000 "1;v-as unsecured . Y corporation by deed transferred all its liabilities . Y then liquidated . The stock transferred by X t o Y was worth $950,000.

An alyse the transaction, indicating b a sis of assets received by the corpora te parties . \10uld your analysis differ if inventories were $460,000 ra ther than $ 3 00,000, and cash reta ine d by X wa s $35, 000 rather than $ 1 95,000 .

VII In an attempt to improve i t s financial posture X corporation offers to exchange securi ties for stock and securities for securi ties under a specified formula. A, who owned 200 shares of X voting stock hav ing a basis of $ 1 0 . 00 p er share, exchanged 50 shares for a face amount $1,000 ZO - y~ar bond paying 7 '10 int ~ r 8' st . B, who oi.-Jn ed both vo~~ng stock; and securitie s excha n g e d a $500 ,. 1 0 year 6% note for a ~)50 20 -year, 7% bond. C who owned only 25 shares of X voting s toc~ having a basis to him of $ 1 0 . 00 per share . exchanged all of it f or a $550 20 year 7% bond . The bas is of the ' no te surrendered by B was its face amount and the fmv of the bonds received by A, Band C were their face amount .